"The Market Only Wants to Hear Good News: Communication Challenges Faced by Fed's Powell"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] "No matter what Federal Reserve (Fed) Chair Jerome Powell says, the market only hears good news from him." This is the conclusion drawn by economic media CNBC on the 7th (local time) after analyzing Powell's recent messages and market reactions. In fact, Powell is facing communication issues with the market.

CNBC pointed out representative examples of 'communication errors' such as the press conference immediately after the July Federal Open Market Committee (FOMC) regular meeting and Powell's Brookings Institution speech and Q&A last week. Powell hinted at slowing the pace of rate hikes in the July press conference and confirmed last week that the four consecutive giant steps (0.75 percentage point rate hikes) could soon end.

The problem was that the market only listened to the 'good messages' and ignored the rest of his remarks. The market interpreted both of Powell's statements as signaling a slowdown in the pace of rate hikes and the approach of easing policies. As a result, the New York stock market showed a wild rally. Ultimately, Fed officials had to flood the market with 'hawkish' remarks emphasizing their commitment to controlling inflation, saying "easing policies are still far off," to prevent misleading signals.

CNBC said, "In both instances, Powell broadly mentioned the Fed's commitment to controlling inflation," and questioned, "Is it the market's problem that it only hears what it wants to hear and ignores the rest? Or is Powell failing in communication?"

Art Hogan, Chief Market Strategist at B. Riley Financial, said, "There is a bit of a problem on both sides," adding, "It's not that there was a lack of effort. Powell really tried to convey the message that rates need to be at a restrictive level to curb inflation. The problem is that it is a moving target."

At the Brookings Institution on the 30th of last month, Powell said that rate hikes could ease to 0.5 percentage points as early as December but also made hawkish remarks such as "rates need to remain at restrictive levels for some time," "the terminal rate could be higher," and "we should be cautious about quickly returning to easing policies historically." However, the market focused on the '0.5 percentage point hike.' The Dow Jones Industrial Average, composed of blue-chip stocks, jumped more than 700 points that day.

This mood changed again as soon as the following week. When the Wall Street Journal (WSJ), during its blackout period, reported that the December rate hike would be 0.5 percentage points but rates would rise "for a longer period and to a higher level," the market plummeted.

CNBC pointed out, "If this development feels familiar, it's because a similar scenario unfolded last summer."

After Powell said at the July FOMC press conference that "slowing the pace of hikes would be appropriate," the market rallied for a week to escape the bear market. But a month and a half later, Powell, visiting Jackson Hole, gave an unusually firm speech. He said, "Rates will remain high for some time," and promised the Fed would "use its tools strongly" to control inflation. He also emphasized the possibility of "some pain" to the economy due to tight monetary policy.

CNBC analyzed that despite multiple warnings, the market still does not fully understand the Fed's message.

The key will be next week. After the last meeting of the year, the December FOMC, Powell will have another opportunity to communicate with the market. It is highly likely that the rate hike will be 0.5 percentage points, not 0.75 percentage points as expected. CNBC emphasized that Powell's clarity must improve at the press conference.

Krishna Guha, Head of Global Policy and Central Bank Strategy at Evercore ISI, analyzed, "It is difficult to maintain a consistent tone from one statement to the next," and said, "Powell may not do well in this regard." He added, "In December, we should expect a stricter stance and a terminal rate of 5 to 5.25%."

Quincy Crosby, Senior Global Strategist at LPL Financial, predicted, "There is no guarantee that Powell will say what the market wants to hear next week," and said, "He might slightly revise his remarks from last week."

This content was produced with the assistance of AI translation services.